Why Does This Oil Giant Keep Buying Utility Assets

Total SA (TOT +0.00%) is one of the world's largest integrated oil companies. However, you wouldn't know it from some of its recent acquisitions in the utility space. The company isn't exactly looking to get out of the oil business, but it is attempting to prepare for an energy future that is very different from the one that exists today. Here's what investors should make of its purchase of electricity assets from Energías de Portugal. 

Oil is still important

The world needs oil and natural gas, which is something that most major integrated energy companies agree on. The two fuels are so integrated into the world's energy needs that it will take a material amount of time to dislodge them. ExxonMobil, for example, has noted that it took 100 years for oil to take over from coal as the world's most important energy source. And coal is really only just falling to the wayside as renewable power sources become more economic.

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Royal Dutch Shell, meanwhile, has explained that even if news headlines are negative about oil and natural gas, the world is still demanding these energy sources. As such, companies like Exxon, Shell, and Total will still need to drill for them. And while the oil sector is highly cyclical, the near-term ups and downs don't change the long-term picture -- which, as peer Chevron has pointed out, is what integrated oil giants focus on most. 

However, that doesn't mean that any of these integrated energy giants is ignoring what is an obvious, if slow, shift taking place in the world today. Electrification is definitely here to stay, and as the growing presence of electric vehicles around the world highlights, the shift is going to be a net negative for oil companies. 

Electricity is the future

One of the ways that large energy companies have been dealing with this transition is to invest more in natural gas. This fuel is used extensively in the generation of electricity, partly because it is cleaner than coal but also because it is increasingly cost-competitive with the dirtier fuel. This is the main approach that Exxon and Chevron have taken, effectively sticking with what they know best. They are basically shifting things underneath the surface but doubling down on their core.

Shell and Total have taken a more aggressive approach, looking to invest directly in electricity-related assets. Shell, for example, owns things like renewable power generation and auto-charging networks. Total, meanwhile, made a splashy electricity-focused bet, paying $1.8 billion in 2018 to buy Direct Energie, a European utility company. This added to other assets, but was a fairly sizable move to gain scale in the company's core European market. 

The company just augmented that purchase with the acquisition of 2.5 million customers and two gas-fueled power plants from Energías de Portugal in mid-May of 2020. Once completed, the company expects to have roughly 8.5 million utility customers in Europe. That puts it well on its way to achieving its 2025 goal of 10 million customers. 

This move follows the company's February acquisition of 2 gigawatts of solar power development projects in Spain. However, that isn't the only country in which the company is inking renewable power deals. Since February it has started an offshore wind project in the United Kingdom, acquired a gigawatt worth of onshore wind assets in France, and expanded its solar footprint in France. Total even adopted a "net zero" emissions goal for 2050 earlier in the year. 

Net zero is a pretty ambitious target for a company whose core business is drilling for oil and gas. But all of the moves it is making on the electricity side of the portfolio are key to the long-term future management is laying out for the business. The use of the term "net" is important, too, because it means that the pluses and minuses on the emissions front will total zero -- not that the company will stop emitting greenhouse gases. In fact, even in the net zero announcement, Total highlighted that it planned to remain an integrated oil giant, albeit one with a material presence in the electricity space. It described itself as a "broad-energy" company. There should be no questions about what Total is looking to do at this point.

Data source: Total

What's particularly interesting is that the company's integrated gas, renewables & power division made up roughly 40% of net operating income in the first quarter -- so in some ways, the shift toward electricity is well under way. Of course, that number has to be put in context: Oil prices are painfully low today, which is depressing the results of the other businesses the company operates. When oil prices recover, these divisions should see revenue and earnings move sharply higher. But strength in the integrated gas, renewables & power division today just goes to show the benefit of the diversification effort management is working on. 

The long-term view

For energy investors who believe that oil is important but under a material threat from cleaner energy sources, Total could be a good way to invest in the energy space. The company isn't giving up on this core business, but it is looking to use oil as a foundation from which to expand into a new area. And it is taking sizable steps that are already showing up in its results. In the down-and-out energy sector, Total looks like an interesting way to pick up an out-of-favor name that's actively working to ensure it has a long-term future.